Thursday, February 08, 2007

Want a National Sales Tax? Repeal the 16th Amendment

I was almost persuaded by Fred Bergsten and Greg Mankiw on tonight's show that raising the federal gas tax and instituting a carbon tax might be good ideas if they were accompanied by significantly lower income tax rates.

Almost.

But not quite.

Because I don't believe this Congress would ever cut marginal tax rates.

And because I believe that Congres would spend this honeypot of new money once they got their paws on it.

And then Congress would become addicted to all that new energy sales tax money, and keep raising the sales tax rate, just like Old Europe has for so many generations. To the detriment of their welfarist stagnant economies.

Greg Mankiw is the brilliant Harvard economist who is now advising Gov. Romney in his presidential campaign. Greg is pushing hard for a $1 hike in the gas tax to reduce consumption and slow carbon emissions. So far Romney has said no.

Fred Bergsten has been influential on the Washington scene for many years after serving in the Carter treasury department. Fred wants a sales tax to promote more saving and reduce our dependence on foreign capital (and energy). I think we save plenty through wealth-creating investment, with family net worth in stocks, bonds, real estate, and family-owned businesses now at a record high $54 trillion. But I'd love to end the multiple taxes on saving and investment caused by our thoroughly screwed-up income tax system.

Apparently Kevin Hasset, another bright Washington guy from the American Enterprise Institute who is advising Sen. McCain, would like a carbon tax to reduce fossil fuel emissions. The revenues would be used to fund elimination of the corporate income tax.

However,I still believe that free enterprise technological advances and market sustitution effects will work, without any government intervention, regulation or subsidies. Actually, gasoline consumption over the past three years has already fallen 8% in the wake of higher pump prices. Markets work. Free prices regulate supply and demand much more efficiently that government planners.

But, there is merit in the notion of eliminating the income tax and replacing it with a consumption tax. Saving and investment would no longer be taxed. Capital deepening would spur more productivity, higher wages and greater entreprenneurship.The economy's potential to grow would be enlarged. More business start-ups, more employment, etc, etc.

Crucially,the trick for a successful national consumption tax scheme is to abolish the income tax altogether. Including the corporate income tax. This way there won't be more taxes (on sales) on top of existing taxes (on income).

Of course Sen. Hillary Clinton wants to abolish the corporate income tax -- by confiscating corporate profits. That's her energy plan. But that's a different idea. It's called state socialism. It's been tried before, and failed. Karl Marx is both dead and wrong.

However,if the numbers and collection systems could ever be worked out satisfactorily, there is a way to avoid the European disease and put together some kind of national sales tax in the U.S.

Abolish the 16th amendment.

You remember, that's the one that legalized the income tax way back in 1916, under Woodrow Wilson.It was passed by Congress in 1913, and then ratified by three-fourths of the states three years later. If I remember correctly, the original top marginal tax- rate was something like 2%. Think of that.

So, if the 16th amendment were repealed, I'm ready to deal on a consumption tax. But that's the only way I'd go there.

About Me

Larry Kudlow

Lawrence Kudlow is CNBC’s Senior Contributor. For many years, he was the host of CNBC’s “The Kudlow Report”. He is also the host of The Larry Kudlow Show, which broadcasts on Saturdays from 10am to 1pm ET on WABC Radio and is syndicated nationally by Cumulus Media. He is also a nationally syndicated columnist and a former Reagan economic advisor. CNBC's The Kudlow Report also airs on Sirius (ch.129) and XM (ch.127) weeknights at 7pm ET.